The purpose of the proposed research program is 1) to contribute to the underlying conceptual research foundation of mental health payment systems, 2) to conduct empirical research on payment system-related issues, and 3) to develop practical forms of payment systems that are fair, that promote cost effective care and that give adequate consideration to the special characteristics of the mental health sector. In the area of conceptual research the main goal is to develop a descriptive model or models of the determinants of health care treatment when both demand and supply-side cost sharing are employed in payment systems and based on this approach, to derive the implications for optimal design of mental health payment systems. I also seek to to incorporate into conceptual models of payment systems the increasingly important practice of third-parties requiring validation in the form of "second opinions," "precertifications," or other clinically-related judgments prior to authorizing payment. Empirical research will proceed in a number of areas with a special focus on the patterns of mental health care for the 40 million Medicare beneficiaries. Focussing on this population is justified because Medicare is the single worst payment system for mental health care in the U.S. and patterns of mental health care for this population are not well understood. The general purpose of research in the applied design category is to adapt payment system priniciples for design of payment systems for mental health care, in light of empirical research on mental health services and special characteristics of the mental health sector. In addition to specific projects, I intend to author a book, Paying for Mental Health that will serve as a resource on economics and payment system-related research, and as a guide for private and public officials concerned with setting the terms for payment of mental health care.